STOCKS AND OIL RISE: Here's what you need to know

Stocks and oil both rallied on Thursday after Wednesday
saw a big intraday reversal as the markets continue their
volatile week.

First, the scoreboard:

Dow: 16,697.3, +212.3, (+1.3%)

S&P 500: 1,951.7, +21.9, (+1.1%)

Nasdaq: 4,582.2, +39.6, (+0.9%)

WTI crude oil: $33.00, +2.7%

Stock Market

Wells Fargo's Gina Martin Adams slashed
her 12-month price target for the S&P 500 to 2,100 from
2,245. This outlook, however, still implies the benchmark US
stock index will gain about 8% over the next year.

Undergirding Martin Adams' view is a contention that earnings
growth will return to US corporates. This is usually what
makes stocks go up.

The problem is that earnings have been under serious pressure for
most of the last year and look poised to remain this way as
energy prices and the strength of the US dollar continue to weigh
on the bottom line of most US corporates. According to RBC
Capital Markets, earnings for the S&P 500 are set to fall
4.5% in the fourth quarter.

"From the rear-view mirror, the bear market in emerging markets
has been painful," he said in
a post on PIMCO's blog.

"When we look out of the windshield, however, these very asset
classes offer the highest potential returns available to
today’s opportunistic investor. So, the exodus from
emerging markets is a wonderful opportunity – and quite possibly
the trade of a decade – for the long-term investor."

And so I think it's not a shock to too many folks that if there's
an attractive stock-related trade that focuses primarily on the
value one can get for expected future earnings, emerging markets
are going to be at or near the top of most lists. Certainly
pegging this as potentially the "trade of a decade" got us
and others reading, but the logic — at least, that you're
never going to really love something before it goes up a
lot in price — is sound.

Recession Watch, 2016

In a note to clients on Thursday, Citi's economics team led
by Ebrahim Rahbari, Willem Buiter, and Cesar Rojas,
wrote:

We believe that we are currently in a highly
precarious environment for global growth and asset markets after
2-3 years of relative calm. The most recent
deterioration in the global outlook is due to a moderate
worsening in the prospects for the advanced economies (AE), a
large increase in the uncertainty about the AE outlook (notably
for the US) and a tightening in financial conditions everywhere.
Unlike most of the previous years, the most recent worsening in
global growth prospects and global sentiment is therefore driven
by the advanced economies rather than EM
... It is likely, in our view, that global
growth will this year once again underperform (against long-term
trends and previous year forecasts). Citi's latest forecasts are
for global growth of 2.5% in 2016 (based on market exchange rates
and official statistics) and around 2.2% (adjusted for probable
Chinese mismeasurement). But in our view, the risk of a global
growth recession (growth below 2%) is high and
rising.

So that all seems bad.

Meanwhile,
John Silvia and his team at Wells Fargo think there's a 23.5%
chance of recession in the next six months. Or, more accurately,
according to one of their models there is a 23.5% chance of
recession in the next six months.

The average probability of all its models suggest a
37.3% chance of recession. But, you know, economics is hard.
Models are weird.

In other economic or market-related indicators that might
be showing something bad happening somewhere in the world,
the US
IPO market has almost entirely dried up, (just three US-based
companies have gone public this year), which is not the kind
of thing you want to see when you're looking for the marginal bid
in risk assets in a decidedly risk-off environment.

This has been a good business for Buffett, and so it makes sense
that he would plug the thing. Also: they spend a lot of money on
advertising. So, you know, what's a little space in the annual
letter?

But this week we've been looking back at some of Buffett's
reflections from last year and so today we bring you his thoughts
on UK-based grocery chain Tesco, one of his worst investments in
recent memory.

Here's Buffett from last year's annual letter:

Attentive readers will notice that Tesco, which last year
appeared in the list of our largest common stock investments, is
now absent. An attentive investor, I’m embarrassed to report,
would have sold Tesco shares earlier. I made a big mistake with
this investment by dawdling.

At the end of 2012 we owned 415 million shares of Tesco, then and
now the leading food retailer in the U.K. and an important grocer
in other countries as well. Our cost for this investment was $2.3
billion, and the market value was a similar amount.

In 2013, I soured somewhat on the company’s then-management and
sold 114 million shares, realizing a profit of $43 million. My
leisurely pace in making sales would prove expensive. Charlie
calls this sort of behavior “thumb-sucking.” (Considering what my
delay cost us, he is being kind.)

During 2014, Tesco’s problems worsened by the month. The
company’s market share fell, its margins contracted and
accounting problems surfaced. In the world of business, bad news
often surfaces serially: You see a cockroach in your kitchen; as
the days go by, you meet his relatives.

We sold Tesco shares throughout the year and are now out of the
position. (The company, we should mention, has hired new
management, and we wish them well.) Our after-tax loss from this
investment was $444 million, about 1/5 of 1% of Berkshire’s net
worth. In the past 50 years, we have only once realized an
investment loss that at the time of sale cost us 2% of our net
worth. Twice, we experienced 1% losses. All three of these losses
occurred in the 1974-1975 period, when we sold stocks that were
very cheap in order to buy others we believed to be even cheaper.

Savings

Goldman Sachs' Jan Hatzius has some thoughts about the savings
rate.

Basically, people are saving more than you'd expect and this
points to the potential for an uptick in consumer spending.

"The personal saving rate—the difference between disposable
personal income and personal outlays—is currently estimated at
5.5% as of December 2015," Hatzius wrote in a note to clients on
Wednesday.

Hatzius adds:

"This number is high relative to the net worth to income ratio,
as shown on the left panel of Exhibit 1.A simple model of the
saving rate finds that the gap between the actual saving rate and
the 'equilibrium' saving rate (which depends on the net worth to
income ratio as well as labor market slack) has risen in the last
two years. Assuming a flat 5.5% personal saving rate and
marking to market the net worth ratio, using current equity and
house prices, and the forecasted levels of slack and income
suggest that the saving rate is now roughly 1.5 percentage points
above its equilibrium value. Taken at face value, the high NIPA
saving rate suggests upside risk to our consumer spending
forecast. However, in isolation the saving rate needs to
be handled with care as a real-time indicator due to frequent
revisions."